UK inflation falls a further 0.2%Savers continue to go unrewarded for now

13 December 2011


CPI fell to 4.8% in November 2011

The UK consumer price index (CPI) fell to 4.8% for the month of November, down from 5% in October but still well above the Bank of England’s 2% target.

The 0.2% drop was driven by a 1% monthly fall in the price of food and non-alcoholic beverages while petrol, clothing and furniture, household equipment and maintenance also fell during November, according to the Office for National Statistics.

However, the cost of domestic heating, alcohol and tobacco increased from October, to ensure that inflation fell no further. The Retail Price Index, which includes mortgage interest payments and was formerly the standard rate of inflation, fell from 5.4% to 5.2% in November.

What does this mean?

While falling inflation is much needed, it remains at an uncomfortably high level, which means many will be cutting back on their Christmas spending as income from salaries (currently rising at 2.3% per year) and savings struggle to keep pace.

From a savings perspective, the picture remains rather bleak for the time being. A basic-rate taxpayer would need to be earning interest on their savings of 6% to beat CPI, once that 20% tax has been removed from any gains. For a higher-rate taxpayer, that target figure rises to 8%.

Earning enough interest to counteract RPI is even more challenging and lower-rate and higher-rate tax payers would need accounts paying 6.5% and 8.7% respectively in order to do so.

Inflation to keep falling

The good news for savers is that inflation is expected to fall further in 2012 and potentially by more significant margins.

Last January saw VAT rise from 17.5% to 20% and as inflation compares costs from one year to the next, this will no longer be a consideration come February 2012.

Mervyn King, governor of the Bank of England has predicted that inflation will fall below 2% by the third quarter of 2012 and remain there for the following two years as UK growth stalls.

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